Even with housing prices falling and so much damage to the real estate market, the homebuilders continue to push on. New neighborhoods continue to slowly pop up and shoppers are still considering new homes. With so many delinquent mortgages and empty houses and desperate sellers, why are people still buying new homes?
Are builders making any money these days? Sort of. The revenue is down to something like a third of the glory days and those that are making a profit aren’t making much. Essentially, they’re trying to stay alive. And to stay alive, they have to keep building.
The builders that survived the housing crash and weren’t already overextended could actually be in good shape. Some of the cost for builders is land acquisition and just like houses these days, land is cheap. They buy it from other builders, or just maw and paw landowners. Whomever they buy the land from that land is cheap. Especially if they can get it from a desperate competing builder who is trying to stay afloat.
Builders have to try and make a profit though, and if they can’t make a profit they aren’t going to keep building. Resellers and homeowners don’t have to make a profit since they may have other reasons for selling. So who is winning in this battle over prices? In neighborhoods near builders, it’s the builders.
Find a neighborhood that isn’t quite finished yet and you’ll see resellers and the builder competing head to head. The builder is almost always happy to undercut the reseller because time is money to them. Many builders will just build a neighborhood 2-3 houses at a time using popular options and sell them to interested buyers, instead of building each to spec by specific buyers.
This all seems counter-intuitive for what is best for the overall recovery of housing. We need to get through all the inventory, not continue to add to it. But the free market must do what it must do. And the buildout of homes does create more jobs for construction workers.
So while the housing recovery is still struggling to even be called a recovery, homebuilders will keep building for the time being. Don’t expect that to change unless the business conditions sour to hard core levels. But most builders use debt and for now they have access to that debt, are willing to undercut sellers, and might even offer some favorable financing to boot.
If you’re in the market, happy hunting. If you’re trying to sell, it’s all about the staging!
Photo: Concrete Forms
 By The Weakonomist |
The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics. Also keep in mind that nothing I say can be construed as financial advice. |
